Introductory seminar: the challenges of electrification in the automotive industry

Publication Type:

Compte Rendu / Report

Authors:

Source:

Report of the Gerpisa monthly seminar, CCFA (2023)

Notes:

Tommaso Pardi, Gerpisa, CNRS-IDHES

Full Text:

The main reason for electrification is carbon emissions. Carbon neutrality: the aim of the carbon neutrality objectives is to limit CO2 emissions. And of all the sectors, the transport sector accounts for half of all emissions. The European Commission has decided to make decarbonisation the main thrust of the Green Deal. The legislative package is highly ambitious, notably with Fit for 55.
Fit for 55 is aimed specifically at the car fleet, which implies the end of the internal combustion engine by 2035. The EU has therefore embarked on an accelerated path towards electrification. This trajectory is unique in the world, as not even China has embarked on this path.
The solution proposed by the European Commission is to sell new electric vehicles. However, the number of cars on the road has increased, and sales of new vehicles are stagnating. In 2021, 10 million new vehicles will be sold. Fleet renewal is becoming slower and slower. In 2021, it will take 26 years to renew the car fleet.
European countries are not equal when it comes to greening their car fleets. In 2021, the gap between Western and Eastern Europe will have widened, as will that between Northern and Southern Europe. Eastern European countries have developed a large car industry for export. The vehicle renewal rate in these countries is 48 years. Access to new vehicles is polarised. Three quarters of vehicles over 20 years old are in Central, Eastern and Southern Europe. The CEECs are equipping themselves with second-hand vehicles, which is causing their emissions to soar. There is therefore an environmental issue at stake in making new vehicles accessible in eastern and southern countries, and in poor households in western countries.
EVs are mainly bought in the Scandinavian countries of northern Europe, and in western European countries and the UK. However, the countries that emit the most are buying few electric vehicles.
Fit for 55: a time bomb? An extension of carbon markets to transport: the "right to pollute" is being commoditised. Polluters will buy the right to pollute corresponding to their level of pollution. From 2026, there will be a carbon market for vehicle carbon. We can imagine a scenario where the countries of the North sell the right to pollute to the poorest and most polluting countries. However, a country cannot leave the carbon market without leaving the EU.
Added to this is the fact that vehicles are moving upmarket: they are becoming heavier, more powerful, and therefore more expensive. Why is this happening? Manufacturers' appetite for vehicles with higher margins: selling less to sell better? But this doesn't explain everything, because European regulations play a role in this "premiumisation". From 1992 onwards, the Germans took control of regulation. There was an inflation of standards: standards that only applied to premium vehicles were introduced for all vehicles.
The CO2 standard should have compensated for this, because premium vehicles produce more CO2. This regulation should have reduced the size of vehicles. But the opposite has happened. The German car lobby helped to ensure that the regulation focused on CO2 emissions by weight. All the manufacturers began to follow the same premiumisation trajectory. However, after dieselgate, electrification became the only way to reduce emissions.
The generalist market has become increasingly competitive (with new entrants, notably from Korea), while at the same time becoming smaller and smaller. As a result, the share of French generalists has shrunk.
With fit for 55, technology changes, but the dynamics of the car market remain, and the move upmarket continues. But it was not inevitable that the EV would be a premium vehicle. But electrification is reinforcing the premiumisation of passenger cars. The battery-powered vehicle has seen an accelerated move upmarket, with almost 600 kg added to its weight.
Electrification also favours manufacturers who specialise in premium products. Similarly, with electrification, foreign manufacturers are mastering the technology, like the Chinese or Tesla. 50% of the battery-powered vehicle is already controlled by foreign manufacturers. What's more, one of the advantages of Chinese manufacturers is their entry-level range. Since 2019, the price of passenger cars has risen by an average of €3,000. This increase is being driven by electrification. Paradoxically, the most subsidised vehicles are the most expensive, which amounts to subsidising the purchase of vehicles intended for wealthy households.

The situation is critical for the French car industry (despite the fact that manufacturers have posted record profits). Capacity utilisation is at an all-time low.

Added to this is the issue of critical materials: by 2022 the average price of a battery has risen, rather than fallen. The issue is therefore to know which manufacturer will have access to these rare materials, while China controls the supply of rare materials. In other words, despite the many announcements about the creation of gigafactories, these remain powerpoint projects. The aim is still to raise capital, with little industrial reality behind it. Most battery supplies in Europe depend on Asian manufacturers based in Eastern Europe. Added to this is the shock of the IRA in the USA, which is closing the battery market in that country. As a result, all Chinese investment has been redirected towards Europe.
What about France? One of the challenges of electrification is to bring production back to France. There is a major divide in France when it comes to access to mobility. Car production in France has plummeted compared with other countries. The car industry is at a crossroads. Either it can succeed with electrification, thereby maintaining production and jobs, or the current trajectory will lead to the decline of the automotive industry.

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